Should You Negotiate Restocking Fees With B2B Customers? Accounting for Carrying Costs on Product Returns

A B2B marketplace isn’t conducive to taking back product returns without charges. Consumer markets are known for adopting a “no- hassle, money-back guarantee”. Unfortunately, this doctrine simply doesn’t apply to business-to-business markets, ones where companies must cover substantial inventory carrying charges. However, does this mean your company shouldn’t be willing to negotiate restocking fees with customers?

Charging Customers on Product Returns

Answering that aforementioned question really comes down to understanding the reasoning behind charging customers for returning product. Unlike B2C markets, the opportunity costs of accepting a product return are much higher for industrial finished goods. It's the reality of operating in business-to-business industry: There are fewer outlets for sales and companies aren’t always guaranteed they’ll be able to sell that returned product within an acceptable timeframe. 

In consumer markets, a company’s return policy is dictated by the norms within the market and the company's agreements. In most cases, retail outlets have contracts in place with vendors concerning returned product: In this case, the outlet will accept the return because their vendor will accept it. However, a B2B enterprise must absorb all the carrying costs themselves.

 

My B2B Restocking Fee Calculation

  Fee: {(Initial Carrying Costs) + (New Carrying Costs) + (Per-Unit or Total Freight Cost) + [(Carrying Cost * Company Overhead Percentage)]} 

The above video and calculation provides a simple three step process to determining a fee on a product return. To learn about this three step process, please go to: Restocking Fees: Three Simple Steps to Covering Carrying Costs

When Should You Negotiate?

There is one simple rule to being flexible on returns: Be willing to negotiate if the product in question has a high inventory turnover rate. Simply put, if it’s a product you know you’ll sell again, and sell quickly, then you can be flexible in how much you charge.

My approach to calculating a restocking fee is fairly straightforward.

• First, I avoid applying a “flat fee” on a return. Why? Because a flat fee doesn’t help you explain your costs to your customer. It’s arbitrary, nondescript and doesn’t define your company’s true costs of accepting the return.

• Second, the fee for the return must cover your true carrying costs on the product in question: The first charge is to cover your original costs and the second portion to cover your new costs until you sell that product again.

• Third, you must account for any original shipping costs to your customer if you included freight as a service. In addition, your fee should include a percentage for support costs: These are costs pertaining to operations – customer service, shipping, accounting etc.

My philosophy isn’t appreciated by everyone. There are some who insist on charging a flat fee for any return. This works for some enterprises, but not for all. However, while I believe that companies should be willing to bend the rules, I also believe they should charge something for accepting a return. After all, you company’s costs of carrying inventory should never be overlooked or ignored. They are true costs and you should focus on recouping as much as possible. 

To read about these carrying costs, please go to: Sample Excel Sheet Calculating Inventory Holding Costs